Las Vegas may be the poster child for the casino industry, however those who know will point to the Macau peninsula and Co-Tai. To put this gambling hub into perspective, Macau is more dense than Manhattan Island and smaller in terms of sq miles. Macau is divided into North (Taipa 6.5 sq miles…the ‘tai’ in Co-tai) (including part of the peninsula) and South (Coloane 7.5 sq miles…the ‘Co” in Co-tai).  It is interesting to note that LVS was the first American mover in the Macau market.

LVS now pulls 30% of its revenue from Singapore, 50% form Macau, and 20% from the USA. The hot areas have clearly been outside the US, but what is the next growth project for LVS. According to CEO Sheldon Adelson, LVS will start working on ‘EuroVegas’ in Madrid Spain. Over the next ten or so years, LVS will develop 12 hotels including 36,000 rooms, six casinos and three golf courses for a cool $22 billion. According to sources, LVS would only provide only up to 35% of the total equity for the project.

Considering Spain is crippled with a massive 24% unemployment rate & 50% youth unemployment, not to mention mountainous debt; maybe they are buying near a bottom.  If this plan is executed properly, LVS’s ‘EuroVegas’ could be a “crisis moment buy”…kind of like a Warren Buffett style play, as they will be taking advantage of a very unique opportunity. The oracle reminds to be, “greedy when everyone is fearful, and fearful when everyone is greedy.”

The ‘Occupy movement’ has been really strong around the world, no that that one, the more important one…occupancy rates. According to the LVS 10k, occupancy is very strong in two of the three Macau operations…having 90%+ occupancy during the 2010 and 2011 period.  Singapore jumped a huge 2000 basis points from 73% occupancy to 93% occupancy, with the average daily room rate increasing 24% too! Similarly, LVS Macau saw room rates increase 8.5% from the prior year on average (averaging their two continued operations (8.95% and 8.1%)). LVS’s Vegas operations saw room rates up 4.2% but occupancy down 2.1%. This is proof that in most cases LVS is a flight (or vacation) to quality internationally, for the ability to increase the average daily room rate while increasing occupancy is a high quality situation (ie not discounting).

Competitor WYNN saw better operations during the same time period too…seeing Las Vegas room rates up 15% and Macau room rates up 8.2%.  WYNN saw occupancy up 400 bps in Macau from 87.8% to 91.8%.   Bottom line, recent market conditions with respect to hotel operations has been strong but volatile. A risk to this analysis includes tough comps for next year…2010 over 2009 was an easy year as markets were better in terms of rates and profitability, however from now on given tougher competition in Macau and already tough competition in Vegas, YoY (year over year) trends will be tough to top.

The bull side to this case includes the fact that during a recent conference call LVS management said from any project they expect a 20% cash on cash return. Thus making a high hurdle rate in order to seriously explore any venture.

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salerno.mark.a@gmail.com